Dyman & Associates Risk Management Projects: What is Bitcoin? The virtual currency built on math, hope and hype

Bitcoin is a currency forged through hardcore mathematics
and buoyed by promises of financial liberation from banks. Its climb has been very thrilling.

Many are embracing bitcoin as a viable means of exchange and
a valuable investment and it is rapidly increasing. Since it is free from meddling by central
banks and what some view as untrustworthy financial systems.

Satoshi Nakamoto, a pseudonymous programmer, developed the
Bitcoin system. It was released a white
paper in 2008 while in early 2009, the network launched uses peer-to-peer
software to transfer bitcoins.

Bitcoin is a purely digital currency; basically a secret
number that is transmitted from one party to another using public key
cryptography. The people running
high-end computers that verify the transactions are called “miners”, they are
awarded newly minted bitcoins for their efforts.

One reason why this so called bitcoin is so attractive is
that its distance from the established financial system and lack of
regulation. Compare to those virtual
currency projects that failed in the past years, bitcoin has so far defied
predictions it would meet the same fate.

Bitcoin “seems to resonate quite deeply” with people who
don’t trust banks, even if the rosy predictions of its potential are baseless
in standard economic theory, said Dick Bryan, a professor with the Department
of Political Economy at the University of Sydney.

No one can create an accurate economic model for Bitcoin,
and everyone who thinks they can give an explanation is posturing,” Bryan said.

Bitcoin’s early supporters have been very happy since if you
bought the virtual currency in early 2011 at US$1 each instead of a new pair of
$600 snakeskin cowboy boots, you’d be up roughly $600,000, depending on
fluctuating exchange rates.

According to the first report on Bitcoin released Dec. 5,
Bank of America Merrill Lynch predicted a value of $1,300 per bitcoin if it
becomes a force in e-commerce and money transfers.

It’s easy to be overwhelmed by the numbers. And when proponents promote Bitcoin from a
clever system for transferring value to a potential replacement for
government-issued currency, it seems that it has no limit.

“Buy bitcoins now. Take 5 percent of your net worth, and put
it into Bitcoin,” said Steve Kirsch[cq], CEO of OneID, a startup that provides
encryption services to protect people’s data, at the Future of Money and
Technology conference in San Francisco in early December.

“You won’t be sorry,” Kirsch said. “I think for the next few
years, any time you buy bitcoins and hold onto them, and then sell it, you’ll
make substantial amounts of money. You’ll be so happy.”

Bitcoin is sometimes being confused to a Ponzi scheme. This is a type of scam where money from new
investments is used to pay off a few early investors with the rest skimmed
until the scheme goes bust. But Bitcoin
is clearly not a Ponzi scheme, the frenzied get-in-now enthusiasm of late
belies the fact that it is a very new and immature software experiment.

“I’ve always had the view that Bitcoin is a very beta
project,” said Evan Schmidt, who runs Buttcoin.org, a mocking blog. “It seems a
lot of people are basically saying ‘Get some bitcoins, hold onto them forever
and you’ll be rich’.”

He launched Buttcoin.org in mid-2011 after becoming
fascinated by the community around Bitcoin — libertarians, scammers,
developers, hackers, early-adopters — as well as its embrace by the Silk Road
online drugs market.

“There were a lot of weird things that were going on,”
Schmidt said.

Buttcoin immortalizes Bitcoin supporters at their most
hyperbolic moments, with heavy doses of sarcasm. The blog gets more than 15,000
hits a month, said Schmidt, who said he’s fine with Bitcoin as a speculative
play but doubtful of it as a currency.

Bitcoin could have a positive effect for e-commerce. Similar to a cash deal, once a bitcoin is
sent, the transaction can’t be reversed unless the receiver gives it back. That’s good for merchants, who may end up
responsible if someone uses another person’s credit card to pay for goods and
the money is reclaimed in what’s known as a “chargeback.”

For vendors of illegal goods, Bitcoin is close to perfect.
“I think it is one of the best innovations coming from the modern computing
era,” said a former Silk Road methamphetamine and heroin dealer, via instant
message. The dealer, who confirmed his role in Silk Road, has a strong
background in technology and said he’d place Bitcoin high on the list of the
most important creations in the last few hundred years.